FT: Rumors of Dell-Rackable Deal

Last week shares of Rackable (RACK) rose on persistent rumors that the company might be acquired by Dell (DELL), which is seeking to expand more forcefully into the data center business. The rumors were initially noted by several investment blogs and podcasts, but have burst into the mainstream financial media this week with a story in the Financial Times.

Rackable provides servers and storage products for high-density data center deployments, and has been noted for its DC power technology, innovative back-to-back rack design, and recent unveiling of a mobile data center.

But it's been tough sledding lately for Rackable, and Dell's data center push appears to be a contributing factor in the company's challenges. In early April Rackable lowered its revenue projections by about 30%, citing pricing pressure from competition with Dell and HP for major accounts. The company replaced its COO when it released its earnings on April 26. Four days later CEO Thomas Barton resigned, and was replaced by board member Mark J. Barrenechea, a veteran of CA and Oracle.

While other publicly-held companies in the data center have been strong performers, Rackable shares are languishing at about $12 a share, down from $41 at this time last year. Some analysts and speculators believe that depressed share price makes Rackable a takeover candidate. Microsoft and Yahoo accounted for 60% of Rackable's revenue between them, which clearly would be attractive to Dell, which is said to be competing fiercely on price.

Rackable shares have stabilized because Dell appears to be "an unlikely bidder," according to the Financial Times. But the current eWeek cover story on Dell speculates that Dell may eventually need help to realize its ambitions in the data center.

Michael Dell's leaked memo mentions that the company is looking at the data center as a source of diversification, although some industry observers, who requested anonymity, said Dell's expertise beyond the PC is nonexistent. If it wants to be in the data center, Dell may find itself as a reseller of someone else's technology, or it may need to acquire another company that plays in that space, they said.